A difficult budget

Updated Jun 01 2020

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AS the government prepares to present its second budget on June 12, its economic team is trying to push through the simplification of the tax regime, ease of doing business and Covid-19 response as cross-cutting themes.

It would be a tough call indeed as every segment of the population — from government servants to the armed forces, from labourers to employers and from the poor to big businesses — wants a helping hand amid the economic contraction.

For a change, provincial cash surpluses may not be available to the centre this year after almost a decade. The revenue shortfall of almost Rs1.6 trillion is too big and has already slashed the pie. The four provinces had promised together about one percent of GDP as surplus to the centre this year out of their joint share of over Rs3.25tr, which now appears compromised around Rs2.2tr.

Next year will be no different given the continuation of the Covid-19 impact at least in the first half. As the current fiscal year will be concluding at a record 9.5pc fiscal deficit, the outlook for 2020-21 can be anything but hunky-dory. The survival and stability will, therefore, be the key challenge in the next fiscal year.

Both the prime minister and his adviser on finance have shunned proposals calling for even a slight increase in tax rates. They want to continue with the stimulus approach

Still, the premier’s adviser on finance and revenue, Dr Abdul Hafeez Shaikh, wants the next year budget to be a “simple policy document” rather than a “horrible story”. Various assumptions for subsidies, grants and support to the vulnerable are still changing and so are the savings on account of interest payments as monetary policy finally takes an accommodating stance — an over five percentage points’ cut is estimated to have a cumulative Rs265 billion cushion so far.

How Dr Shaikh succeeds in the allocation of actually limited resources to keep the budget deficit at a minimum level that is acceptable to the International Monetary Fund (IMF) to pull through a troubled programme would be interesting to watch. The overall debt profile is heading north and has its own long-term consequences.

In the fire-fighting budget amid the Covid-19 gloom, Dr Shaikh’s manoeuvring capabilities will be put to test. Like his previous stint as head of the economic team, he remains an outsider to the PTI’s rank and file. Yet he has to put back on track the reform agenda, reinvigorate the privatisation programme for additional revenues in difficult market conditions and correct wrongs in the energy sector.

In his 2012 budget speech, Dr Shaikh had lamented that even after the injection of Rs1.25tr in five years the power sector remained a source of concern. Since then, another trillion rupees have gone down the same drain and the circular debt has monstrously moved past Rs2tr again. Its financing and limiting subsidies remain central to the survival of the IMF programme.

Simultaneously, revenues remain the central challenge. A depressed economy can hardly afford more tax burden. After quite some time, the Federal Board of Revenue (FBR) appears to be not in the driving seat — it is not as much the adjudicator of its own cause as it used to be. With support from some heavyweights in the prime minister’s think tank on the economy, economic ministries — finance, industries and commerce — keep on challenging the taxation proposals.

Dr Shaikh has repeatedly pushed back taxation files that suggest increased tax compliance cost and insisted to the extent of irritation the ideas relating to the simplification of businesses rather than business strangulation. The revenue policy themes are generally coming up from the think tank, the World Bank, the National Tariff Commission and tax consultants so that the FBR is relegated to the role of an implementing agency instead of policymaker.

For example, a lot of debate is still going on about how to limit the number of taxes to five or six, which are high revenue-yielding instruments instead of 40-45 taxes and duties with questionable cost-benefit ratios.

In this context, the minimum tax regime of the FBR is now in question. It promised guaranteed revenue flows, but is leading businesses to show losses through double book-keeping for tax evasion. Enforcement mechanisms, therefore, are also coming under scrutiny now.

At the same time, no ministry, agency or stakeholder wants to be tutored on budget making, fiscal, monetary and revenue strategy and yet have to mould their stances because members of the think tank and private revenue experts have direct access to all power corridors even though the traditional revenue advisory commission could not be operationalised this year.

Both the prime minister and his adviser on finance have shunned proposals even for a slight increase in tax rates because of the economic downturn and want to continue with the stimulus approach. Dr Shaikh, Dr Ishrat Husain, Shaukat Tarin and Razak Dawood have called into question the number of taxes like customs duty, additional customs duty and regulatory duty. They are instead building pressure for the enforcement side to check smuggling and effectively recover collections from bottlers, cigarette suppliers and similar consumer goods of which contraband, duplicate and substandard products flood the markets.

It is in this background that at least 2,000 tariff lines are expected to see total abolition or a substantial cut in additional customs and regulatory duties on raw material and intermediary goods used by export sectors. It has been acknowledged that there was no need for a new tax – all taxes were already in place and will start accruing as soon as businesses resume operations.

On this, the economic team is also banking on bridging the 50pc tax gap — the difference between potential and actual collection — through the enforcement mechanism with expert advice from the private sector. A 15-20pc success could add Rs400-500bn in additional revenue without new measures. For this, capacity-based taxation for traders and small businesses across the country is under review.

Published in Dawn, The Business and Finance Weekly, June 1st, 2020